INTRODUCTION
Bahrain has recently ratified Article 1 of the Legislative Decree No.40 of 1999, which grants GCC nationals unrestricted land ownership in Bahrain. Article 1 states “Nationals of GCC States may own constructed properties and lands in the State of Bahrain by any prescribed method of legal, well or inheritance conveyance between individuals and shall be treated in this respect as Bahrainis”.
Previously, all non- Bahrainis were limited to a Freehold Title restricted to certain designated investment areas such as Juffair, Seef, Amwaj Islands, Reef Island, Durrat Marina and Durrat Al Bahrain amongst others. However, with the ratification, Bahrainis and other GCC nationals can hold a Freehold Title on property anywhere in Bahrain. According to Ahmed Al Haddad from the Shura council, GCC nationals make up 93% of all Freehold Title ownership, while Non-GCC nationals make up just 7% of Freehold Title ownership. In this article, we will explore what the ratification of this law could potentially mean for the Real Estate and Construction sector.
The current state of the Real Estate and Construction Industry.
Since the 2008 Financial Crisis, the Real Estate and Construction industries have been struggling relative to the rest of the economy. This can be measured in several ways: FDI stock, cumulative GDP growth, and cumulative productivity growth. First, we will look at FDI stock.
Source: Information and eGovernment Authority (IGA) Bahrain, 2018
Rest of Economy calculations are Economy wide FDI stock less Construction and Real Estate, Changes are calculated by taking latest available data (2018) and subtracting by earliest available data.
From the data above, we can see that both the Construction sector and the Real Estate sector have seen a large decline in FDI stock from 2008 to 2018 (39.31% and 25.98% respectively), in comparison to the Rest of the Economy, which has seen a 54.73% increase in FDI stock. Additionally, FDI stock as a percentage of total GDP for each sector has also declined from 11.07% to 4.97% for the Construction sector, and 79.96% to 47.45% for the Real Estate sector. It is clear that there has been a significant outflow of net FDI for these two sectors, indicating that the sectors have been struggling to attract FDI.
Next, when we look at cumulative GDP growth, both the Construction and Real Estate sectors have struggled to recover since the Financial Crisis relative to the Rest of the Economy, as seen in the graph below.
Source: Information and eGovernment Authority (IGA) Bahrain
Rest of Economy GDP are economy wide GDP less Real Estate and Construction Value Added GDP. Calculations for changes are done by summing 4 quarter Value added GDP to get Yearly GDP within a given quarter, where cumulative GDP changes of each sector are the changes in yearly GDP of a different quarter subtracted by earliest Value added Yearly GDP figures for Rest of Economy, Real Estate, and Rest of Economy. 2010=100.
In comparison to the rest of the economy, we see that Construction had only grown by 7% in total since Q4 of 2008, and Real Estate had contracted by 1.45% since Q4 of 2008. In comparison, the Rest of the Economy had grown by a total of 38.02% since Q4 of 2008. In addition, we see that the Rest of the Economy had recovered much quicker than the Construction and Real Estate sectors, as the Rest of the Economy had recovered from the initial decline at Q3 of 2010, while Construction and Real Estate saw their outputs recovered by Q1 of 2018 and Q1 2017 respectively (with Real Estate later on contracting below the initial Q4 2008 level).
Last, we look at the productivity of these sectors. Productivity is measured as output divided by total workers. Below is a graph of cumulative change in productivity.
GDP source: Information and eGovernment Authority (IGA) Bahrain
Labor Source: Labor Market Regulatory Authority (LMRA) Bahrain
Productivity is defined as Total GDP (from above measurements) divided by total labor for a given sector.
Similarly to the above graph of cumulative growth, cumulative productivity experiences a similar pattern with a steep decline post-2008. After a sharp decline that only began to improve in early 2010, the productivity in the Rest of the Economy has fluctuated around the 0% rate, almost reaching pre-2008 productivity levels. On the other hand, both the Construction and Real Estate sectors have seen ever- decreasing productivity levels, reaching troughs of -25.03% and -37.37% respectively and only beginning to improve by Q1 2016. Overall, productivity in the Construction and Real Estate sectors saw a sharper decline than the Rest of the Economy post-2008, and a long period of gradual decreasing productivity, as we only begin to see improvements in the aforementioned sectors in the last 4 years.
From the data above, we can see that these two sectors have significantly underperformed relative to the rest of the economy. This is based on lower FDI stock, lower cumulative GDP growth, and depressed productivity levels since the Financial Crisis. This is considering that FDI for Bahrain comes mostly from GCC nations such as UAE, Saudi Arabia, and Kuwait , as well as India.
What the ratification could potentially mean
We can see that the Real Estate and Construction sectors have struggled to grow or even recover from the crisis.. Thus, with the law that eases capital movements for GCC investors and removes restrictions, we can hope to see an increase in FDI and further contributions to the non-oil economy in Bahrain. Seeing as Real Estate and property remains an attractive asset class to foreign and local investors, macroeconomic theory would suggest that this is a positive change for the national economy. Real Estate in particular is an attractive investment because of the wealth effect it grants investors, and it is a popular investment asset in the GCC, with the results from Select Property Group’s 2018 GCC investor survey recording that 75% of investors in the GCC invested in GCC property. Thus, Bahrain will benefit by increasing opportunities for GCC nationals to invest in its Real Estate, and therefore both Real Estate and Construction will see an increase in output, FDI stock, and productivity levels.
However, we must not be too optimistic about the impacts of extending the Freehold Title of GCC nationals to unrestricted areas. This is because investment zones, that are currently open to GCC nationals and foreigners have many benefits that make them attractive to current investors. As a result, there may be a scenario in which the expansion of ownership towards other property areas does not attract more GCC national investors, due to the strengths and attractiveness of these investment zones.
conclusion
The ability for GCC nationals to hold property outside the investment zones may potentially allow for an increase in FDI stock for both the Real Estate and Construction sectors. As a result, industries that are struggling at the moment may benefit from the ratification of the law. However, as previously mentioned, given that GCC nationals can hold property in investment zones, it is unclear how significant a benefit the ratification of the law will have, and it would depend on whether GCC nationals would receive additional benefits from holding property outside specific zones.
This article was written under supervision and Guidance of Senior Researcher Baland Rabayah. He is ultimately responsible for all accuracy of information presented above.
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